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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-----------------
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
-----
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 20, 1999
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 001-10811
SMART & FINAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE NO. 95-4079584
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
600 Citadel Drive
City of Commerce, California 90040
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (323) 869-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
The registrant had 29,136,995 shares of common stock outstanding as of July 30,
1999.
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SMART & FINAL INC.
Index
Part I
Financial Information
Page
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets 2
Unaudited Consolidated Statements of Operations 3
Unaudited Consolidated Statements of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Part II
Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
1
SMART & FINAL INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
June 20, January 3,
ASSETS 1999 1999
------------ ------------
Current assets: (Unaudited)
Cash & cash equivalents $ 34,396 $ 20,887
Trade notes and accounts receivable, less
allowance for doubtful accounts of
$3,052 in 1999 and $3,660 in 1998 59,915 70,155
Inventories 150,882 157,678
Prepaid expenses 13,555 22,341
Deferred tax asset 11,511 11,511
------------ ------------
Total current assets 270,259 282,572
Property, plant and equipment:
Land 36,844 36,387
Buildings and improvements 29,563 29,625
Leasehold improvements 88,002 85,501
Fixtures and equipment 167,251 162,148
------------ ------------
321,660 313,661
Less - Accumulated depreciation and amortization 111,687 108,588
------------ ------------
Net property, plant and equipment 209,973 205,073
Assets under capital leases, net of accumulated
amortization of $6,910 in 1999 and $6,669 in 1998 3,775 4,016
Goodwill, net of accumulated amortization
of $2,787 in 1999 and $2,060 in 1998 55,940 56,667
Deferred tax asset 3,730 3,730
Other assets 27,164 30,206
------------ ------------
Total assets $ 570,841 $ 582,264
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 4,803 $ 139,680
Accounts payable 87,552 97,568
Payable to Parent - 1,681
Accrued salaries and wages 15,404 13,951
Other accrued liabilities 32,098 40,789
------------ ------------
Total current liabilities 139,857 293,669
Long-term liabilities:
Notes payable, net of current maturities 12,704 15,839
Notes payable to Parent 15,965 55,388
Bank debt 124,500 -
Obligations under capital leases 7,146 7,485
Other long-term liabilities 3,091 3,033
Workers' compensation reserve, postretirement
and postemployment benefits 18,427 17,564
------------ ------------
Total long-term liabilities 181,833 99,309
Stockholders' equity:
Preferred stock, $1 par value (authorized-
10,000,000 shares; no shares issued) - -
Common stock, $0.01 par value (authorized-
100,000,000 shares; 29,136,995 shares issued
and outstanding in 1999 and 22,527,179 in 1998) 291 225
Additional paid-in capital 204,025 144,987
Notes receivable for stock (93) -
Cumulative translation loss (835) (835)
Retained earnings 45,763 44,909
------------ ------------
Total stockholders' equity 249,151 189,286
------------ ------------
Total liabilities and stockholders' equity $ 570,841 $ 582,264
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
2
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------------- ----------------------------
June 20, June 21, June 20, June 21,
1999 1998 1999 1998
------------ ----------- ------------ -----------
(Unaudited) (Unaudited)
Sales....................................................... $ 418,608 $ 380,577 $ 816,945 $ 714,855
Cost of sales, buying and occupancy......................... 365,391 332,697 713,650 627,235
----------- ----------- ----------- -----------
Gross margin................................................ 53,217 47,880 103,295 87,620
Operating and administrative expenses....................... 45,880 43,458 91,982 82,876
----------- ----------- ----------- -----------
Income from operations............................... 7,337 4,422 11,313 4,744
Interest expense, net....................................... 5,027 2,438 10,108 4,566
----------- ----------- ----------- -----------
Income before income taxes, extraordinary item and
cumulative effect of accounting change................. 2,310 1,984 1,205 178
Income taxes................................................ 893 753 474 (27)
----------- ----------- ----------- -----------
Income from consolidated subsidiaries................. 1,417 1,231 731 205
Equity earnings in unconsolidated subsidiary................ 71 57 283 187
----------- ----------- ----------- -----------
Income before extraordinary item
and cumulative effect of accounting change....... 1,488 1,288 1,014 392
Extraordinary loss on extinguishment of debt,
net of tax effect of $147................................. 166 - 166 -
Cumulative effect of accounting change (start-up costs,
net of tax effect of $758)................................ - - - 1,090
----------- ----------- ----------- -----------
Net income (loss)..................................... $ 1,322 $ 1,288 $ 848 $ (698)
=========== =========== =========== ===========
Earnings (loss) per common share:
Earnings per common share before extraordinary item and
cumulative effect of accounting change................. $ 0.06 $ 0.06 $ 0.04 $ 0.02
Extraordinary loss on extinguishment of debt
per common share....................................... (0.01) - (0.01) -
Cumulative effect of accounting change per common share.. - - - (0.05)
----------- ----------- ----------- -----------
*Earnings (loss) per common share.......................... $ 0.06 $ 0.06 $ 0.04 $ (0.03)
=========== =========== =========== ===========
Weighted average common shares.............................. 23,378,215 22,446,511 22,952,697 22,421,082
=========== =========== =========== ===========
Earnings (loss) per common share, assuming dilution:
Earnings per common share, assuming dilution, before
extraordinary item and cumulative effect of
accounting change...................................... $ 0.06 $ 0.06 $ 0.04 $ 0.02
Extraordinary loss on extinguishment of debt
per common share....................................... (0.01) - (0.01) -
Cumulative effect of accounting change per common share.. - - - (0.05)
----------- ----------- ----------- -----------
*Earnings (loss) per common share, assuming dilution....... $ 0.06 $ 0.06 $ 0.04 $ (0.03)
=========== =========== =========== ===========
Weighted average common shares
and common share equivalents............................ 23,451,919 22,865,913 22,989,549 22,630,783
=========== =========== =========== ===========
Dividend per common share................................... $ - $ 0.05 $ - $ 0.10
=========== =========== =========== ===========
* Earnings per share totals do not aggregate due to rounding
The accompanying notes are an integral part of these consolidated
financial statements.
3
SMART & FINAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Twenty-four Weeks Ended
June 20, June 21,
1999 1998
----------------------------
(Unaudited)
Cash Flows From Operating Activities:
Net income (loss)........................................... $ 848 $ (698)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on disposal of fixed assets........................... (524) (1,086)
Depreciation and amortization.............................. 13,966 13,008
Amortization of deferred financing costs................... 1,023 -
Extraordinary loss on extinguishment of debt............... 166 -
Cumulative effect of accounting change, net of taxes....... - 1,090
Equity earnings in unconsolidated subsidiary............... (283) (187)
Decrease (increase), net of business acquisition, in:
Trade notes and accounts receivable....................... 10,240 2,806
Inventories............................................... 6,796 7,583
Prepaid expenses and other................................ 4,364 4,699
Increase (decrease), net of business acquisition, in:
Accounts payable.......................................... (9,313) (2,351)
Accrued liabilities....................................... 1,453 2,513
Other liabilities......................................... (5,495) (4,183)
--------- ---------
Net cash provided by operating activities.................. 23,241 23,194
--------- ---------
Cash Flows From Investing Activities:
Acquisition of property, plant and equipment................ (14,372) (11,493)
Proceeds from disposal of property, plant and equipment..... 692 843
Acquisition of business..................................... - (44,401)
Other....................................................... 105 (245)
--------- ---------
Net cash used in investing activities...................... (13,575) (55,296)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of costs........ 20,502 1,175
Borrowings on bank line of credit........................... 10,000 65,000
Payments on bank line of credit............................. (19,000) (36,000)
Payments on notes payable................................... (4,851) (1,883)
Change in payable to Parent and affiliates.................. (1,681) 3,743
Quarterly dividend paid..................................... (1,127) (2,241)
--------- ---------
Net cash provided by financing activities.................. 3,843 29,794
--------- ---------
Increase (decrease) in cash and cash equivalents............... 13,509 (2,308)
Cash and cash equivalents at beginning of year................. 20,887 22,891
--------- ---------
Cash and cash equivalents at end of period..................... $ 34,396 $ 20,583
========= =========
Noncash Investing and Financing Activities:
Note to Parent extinguished for common stock issued......... $ 39,423 $ -
Note issued in connection with acquisition of business...... - 17,500
--------- ---------
Total noncash transactions................................. $ 39,423 $ 17,500
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
4
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
Smart & Final Inc. (the "Company") is a Delaware corporation and is a 57.3
percent owned subsidiary of Casino USA, Inc. (the "Parent").
The consolidated balance sheet as of June 20, 1999, the consolidated
statements of operations and cash flows for the twelve and twenty-four weeks
ended June 20, 1999 and June 21, 1998 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of these financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended January 3, 1999.
(2) Fiscal years
The Company's fiscal year ends on the Sunday closest to December 31. Each
fiscal year consists of twelve-week periods in the first, second and fourth
quarters and a sixteen-week period in the third quarter.
(3) Interest expense
Interest expense was incurred primarily on borrowings under the Company's
revolving credit facilities and loans from its Parent. The Company paid $10.1
million and $4.5 million in interest expense in the twenty-four weeks ended June
20, 1999 and June 21, 1998, respectively.
(4) Income taxes
The Company and Casino USA, Inc. are parties to a tax sharing arrangement
covering income tax obligations in the state of California. Under this
arrangement, the Company received tax sharing benefits of $1,257,000 and
$1,846,000 in the twenty-four weeks ended June 20, 1999 and June 21, 1998,
respectively, from the Parent for state income taxes overpaid, due to taxable
losses in the first half of 1999 and 1998. The Company did not pay any federal
income taxes in the twenty-four weeks ended June 20, 1999 and June 21, 1998, due
to taxable losses in the first half of each year.
(5) Earnings per common share
Earnings per common share is based on the weighted average number of common
shares outstanding. Earnings per common share, assuming dilution includes the
weighted average number of common stock equivalents outstanding related to
employee stock options and a stock purchase agreement.
5
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(6) Dividend
The declaration and payment of dividends is subject to the discretion of
the Company's Board of Directors, and there can be no assurance whether or when
dividends will be paid in the future. The Company's debt facilities also contain
restrictions on the amount of cash dividends declared or paid. The Company
announced in a press release dated February 17, 1999, that, as part of a program
to reduce debt levels and interest expense, dividends on its common stock have
been suspended indefinitely. The suspension of dividends was effective
following the payment of the fourth quarter 1998 dividend paid on January 29,
1999.
(7) Stockholders' Equity
During the second quarter of 1999, the Company completed its rights
offering pursuant to its Registration Statement on Form S-3. The Company issued
6,486,406 shares of common stock at a fixed subscription price of $9.25 per
share. The offering increased stockholders' equity approximately $57.9 million
after expenses of the offering.
The Company's Parent exercised all of its subscription rights and acted as
a standby purchaser of shares not subscribed for by other stockholders. As a
result, the Parent increased its ownership by 4,271,935 shares and increased its
ownership interest in the Company to 57.3 percent. Consideration for shares
subscribed by the Parent was the exchange of $39.4 million of its $55.4 million
loan to the Company.
Pursuant to an agreement dated March 7, 1989, the Company's former Chairman
was obligated to purchase 100,000 common shares. The agreement, as amended at
December 29, 1996, included a fixed purchase price of $8.90 per share. On April
22, 1999, the Company's former Chairman fulfilled his obligation by purchasing
the 100,000 common shares.
(8) Segment Reporting
The Company has two reportable segments: Stores and Foodservice. The
stores segment provides food and related items in bulk sizes and quantities
through non-membership grocery warehouse stores. The foodservice distribution
segment provides delivery of food, restaurant equipment and supplies to mainly
restaurant customers and Smart & Final stores. Corporate expense is comprised
primarily of the Company's corporate expenses incidental to the activities of
the reportable segments and rental income from Smart & Final Stores. The
Company's reportable segments are strategic business units that offer different
products and services. They are managed separately because each segment
requires different technology and marketing strategies.
The Company does not allocate interest, income taxes or nonrecurring gains
and losses to the reportable segments. These costs are included in Corporate
Expense below. The Company
6
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
evaluates performance based on profit or loss from operations before income
taxes not including nonrecurring gains and losses.
The revenues, profit or loss and other information of each segment are as
follows, amounts in thousands:
For the twelve weeks ended June 20, 1999:
Corporate
Stores Foodservice Expense Total
-------- ----------- --------- ---------
Revenues from external
customers $323,423 $95,185 $ - $ 418,608
Intercompany real estate
charge (income) 3,148 - (3,148) -
Interest income - - 202 202
Interest expense - - 5,229 5,229
Pre-tax income (loss) before
extraordinary item and cumulative
effect of accounting change 8,990 (1,741) (4,939) 2,310
For the twelve weeks ended June 21, 1998:
Corporate
Stores Foodservice Expense Total
-------- ----------- --------- ---------
Revenues from external
customers $272,993 $107,584 $ - $ 380,577
Intercompany real estate
charge (income) 3,110 - (3,110) -
Interest income - - 75 75
Interest expense - - 2,513 2,513
Pre-tax income (loss) before
extraordinary item and cumulative
effect of accounting change 5,218 (511) (2,723) 1,984
7
SMART & FINAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the twenty-four weeks ended June 20, 1999:
Corporate
Stores Foodservice Expense Total
-------- ----------- --------- ---------
Revenues from external
customers $617,889 $199,056 $ - $ 816,945
Intercompany real estate
charge (income) 6,342 - (6,342) -
Interest income - - 401 401
Interest expense - - 10,509 10,509
Pre-tax income (loss) before
extraordinary item and cumulative
effect of accounting change 12,463 (1,271) (9,987) 1,205
For the twenty-four weeks ended June 21, 1998:
Corporate
Stores Foodservice Expense Total
-------- ----------- --------- ---------
Revenues from external
customers $496,435 $218,420 $ - $ 714,855
Intercompany real estate
charge (income) 6,335 - (6,335) -
Interest income - - 170 170
Interest expense - - 4,736 4,736
Pre-tax income (loss) before
extraordinary item and cumulative
effect of accounting change 6,192 (1,938) (4,076) 178
(9) Legal Actions
The Company has been named as defendant in various legal actions arising in
the normal conduct of its business. In the opinion of management, after
consultation with counsel, none of these actions are expected to result in
significant liability to the Company.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and notes thereto and the
Company's Form 10-K for the year ended January 3, 1999.
Summary
Smart & Final Inc. (the "Company") reported net income of $1.3 million, or
$0.06 per diluted share, for both twelve-week periods ended June 20, 1999 and
June 21, 1998. The 1999 results include an extraordinary loss on extinguishment
of debt, net of tax, of $0.2 million, or $0.01 per diluted share.
For the twenty-four weeks ended June 20, 1999, the Company reported net
income of $0.8 million, or $0.04 per diluted share, compared to a net loss of
$0.7 million, or $0.03 per diluted share, in the twenty-four weeks ended June
21, 1998. The 1998 period included a cumulative effect of accounting change,
net of tax, charge of $1.1 million, or $0.05 per diluted share, related to
adoption of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 98-5 which required write-off of start-up costs.
Operating earnings increased sharply from $4.7 million in the first half of
the prior year to $11.3 million in the same period of the current year. This
improvement was attributed to increased sales, improved gross margin rates as
well as reduced operating and administrative expenses as a result of aggressive
cost reduction programs.
Improved operating results were partially offset by increased interest
costs for the first half of 1999. Interest expense, net increased due to higher
debt levels and rate increases. The recently completed offering of common stock
to the Company's stockholders has improved the Company's financial position and
is expected to significantly reduce interest expense.
9
Results of Operations
The following table shows, for the periods indicated, certain condensed
consolidated income statement data, expressed as a percentage of sales.
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------- -----------------------
June 20, June 21, June 20, June 21,
1999 1998 1999 1998
-------- --------- -------- --------
Sales:
Store 77.3% 71.7% 75.6% 69.4%
Foodservice distribution sales 22.7 28.3 24.4 30.6
----- ----- ----- -----
Sales, consolidated total 100.0 100.0 100.0 100.0
Cost of sales, buying and occupancy 87.3 87.4 87.4 87.7
----- ----- ----- -----
Gross margin 12.7 12.6 12.6 12.3
Operating and administrative expenses 11.0 11.4 11.3 11.6
----- ----- ----- -----
Income from operations 1.8 1.2 1.4 0.7
Interest expense, net 1.2 0.6 1.2 0.6
----- ----- ----- -----
Income before income taxes,
extraordinary item and
cumulative effect of accounting change 0.6 0.5 0.1 --
Income taxes 0.2 0.2 0.1 --
----- ----- ----- -----
Income before extraordinary item and
cumulative effect of accounting change 0.4 0.3 0.1 0.1
Extraordinary loss on extinguishment
of debt, net of tax -- -- -- --
Cumulative effect of accounting change
(start-up costs) -- -- -- 0.2
----- ----- ----- -----
Net income (loss) 0.3% 0.3% 0.1% (0.1)%
===== ===== ===== =====
. Totals do not aggregate due to rounding.
The following table sets forth pre-tax profit or loss, in millions,
for each of the Company's various reportable segments:
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------- -----------------------
June 20, June 21, June 20, June 21,
1999 1998 1999 1998
-------- --------- -------- --------
Stores $ 9.0 $ 5.2 $12.5 $ 6.2
Foodservice (1.8) (0.5) (1.3) (1.9)
----- ----- ----- -----
Segment totals 7.2 4.7 11.2 4.3
Interest and other corporate expenses 4.9 2.7 10.0 4.1
----- ----- ----- -----
Consolidated pre-tax income (loss)
before extraordinary item and
cumulative effect of accounting change $ 2.3 $ 2.0 $ 1.2 $ 0.2
===== ===== ===== =====
10
Background
The Company continued its expansion program in 1999 and 1998 as shown in
the following table:
Two
Quarter Ended Quarters Ended Year Ended
-------------------- -------------------- -----------
June 20, June 21, June 20, June 21, January 3,
1999 1998 1999 1998 1999
-------- --------- -------- --------- -----------
USA:
Beginning store count 210 169 209 167 167
Stores opened:
New stores 2 -- 3 2 5
Relocations -- 1 -- 3 3
Acquired -- 39 -- 39 39
Stores relocated or closed -- (1) -- (3) (5)
---- ---- ---- ---- ----
Ending store count 212 208 212 208 209
---- ---- ---- ---- ----
MEXICO:
Store count beginning 6 6 6 5 5
New stores opened -- -- -- 1 1
---- ---- ---- ---- ----
Store count ending 6 6 6 6 6
---- ---- ---- ---- ----
Grand Total 218 214 218 214 215
==== ==== ==== ==== ====
Mexico operations are not consolidated and are reported on the equity
basis.
Although new stores are important to the Company's continued growth and
profitability, each new store opening initially penalizes earnings because
stores are not immediately profitable. To date new stores opened in existing
market areas generally have achieved break even on a pre-tax basis after
allocation of all operating expenses within the first six to eighteen months.
Stores opened in new market areas, which mature more slowly, generally have
achieved break even in approximately three years. Because of the complex
customer mix, break-even of the Florida stores is expected to take an even
longer period.
Each of the Company's fiscal years consists of twelve-week periods in the
first, second and fourth quarters of the fiscal year and a sixteen-week period
in the third quarter.
Comparison of Twelve Weeks Ended June 20, 1999 with Twelve Weeks Ended June 21,
1998.
Sales. Second quarter 1999 sales were $418.6 million, up 10.0% over the
comparable 1998 period. Sales reflect the May, 1998 acquisition of the United
Grocers Cash & Carry ("Cash & Carry") store operations.
11
Store sales, including Cash & Carry, increased 18.5%, from $273.0 million
in second quarter 1998 to $323.4 million in second quarter 1999. Excluding Cash
& Carry, store sales increased 7.3% in the second quarter of 1999 versus the
second quarter of 1998. Comparable store sales for the second quarter of 1999
increased 3.9% over the prior year period. Average comparable transaction size
also increased, by 3.3%, to $34.72 in the second quarter of 1999. Store sales
reflect the eight new stores, including relocations, opened in 1998 and the
three new stores opened in the first half of 1999. Additionally, 39 stores were
acquired from United Grocers in May 1998.
Foodservice distribution sales decreased 11.5% from $107.6 million in the
second quarter of 1998 to $95.2 million in the current year second quarter.
This decrease in part reflects the decision made in the latter part of 1998 to
focus foodservice growth on improved credit quality and profitability of
foodservice distribution business versus aggressive sales growth.
Gross Margin. Gross margin improved 11.1% from $47.9 million in the second
quarter of 1998 to $53.2 million in the current year quarter. As a percentage
of sales, gross margin improved from 12.6% in the prior year quarter to 12.7% in
second quarter 1999. The increase in gross margin percentage was due to a
number of factors: higher foodservice margins were achieved by focusing on
improved credit quality and margins and reducing distribution expenses, and a
higher proportion of sales from stores which generate higher gross margins and
higher expenses than foodservice distribution sales. The increases in gross
margin were offset by the inclusion of Cash & Carry, acquired in May 1998, which
operates at lower gross margin and expense levels than Smart & Final stores.
Operating and Administrative Expenses. Operating and administrative
expenses for the second quarter of 1999 were $45.9 million, up $2.4 million, or
5.6%, over the second quarter of 1998. These expenses, as a percentage of
sales, decreased from 11.4% in the second quarter of 1998 to 11.0% in the second
quarter of 1999. Expenses, as a percentage of sales, declined due to the
inclusion of Cash & Carry, acquired in May 1998, which operates at lower gross
margin and expense levels than Smart & Final stores and an intensive corporate-
wide expense reduction program. These improvements were partially offset by
increased operating expenses from foodservice operations.
Interest expense, net. Interest expense, net increased from $2.4 million
in the second quarter of 1998 to $5.0 million in the second quarter of 1999.
Interest expense, net increased due to higher weighted average borrowings as
well as higher weighted average interest rates as a result of the Company's debt
restructuring in late 1998. Weighted average borrowings for the second quarter
of 1999 increased over the comparable 1998 quarter as a result of spending
required for working capital and the Company's expansion program, which includes
the 1998 Cash & Carry acquisition.
12
Comparison of Twenty-Four Weeks Ended June 20, 1999 with Twenty-Four Weeks Ended
June 21, 1998.
Sales. Sales in the first half of 1999 were $816.9 million, up 14.3% from
the comparable 1998 period. Sales reflect the May 1998 acquisition of Cash &
Carry stores operations.
Store sales, including Cash & Carry, increased 24.5%, from $496.4 million
to $617.9 million in the first half of 1999. Excluding Cash & Carry, store
sales increased 7.7% in the first half of 1999 versus the same period of 1998.
Comparable store sales increased 4.2% in the first half of 1999. Average
comparable transaction size also increased 4.8% to $33.42 in the first half of
1999.
Foodservice distribution sales decreased 8.9% to $199.1 million for the
first half of 1999. This decrease is in part the result of focusing foodservice
growth on improved credit quality and profitability of foodservice distribution
business versus aggressive sales growth.
Gross Margin. Gross margin improved 17.9% from $87.6 million in the first
half of 1998 to $103.3 million in the 1999 twenty-four-week period. As a
percentage of sales, gross margin increased from 12.3% of sales for the first
half of 1998 to 12.6% in the comparable 1999 period. The increase in gross
margin percentage was due to a number of factors: higher foodservice margins
achieved by a focus on improved credit quality and profitability and reduced
distribution expenses, increased store margins due to purchasing economy and
store assortment mix and a lower overall mix of foodservice sales which carry
lower margins than store sales. The overall margin was reduced by the inclusion
of Cash & Carry, acquired in May 1998, which operates at lower gross margin and
expense levels than Smart & Final stores.
Operating and Administrative Expenses. Operating and administrative
expenses for the first half of 1999 were $92.0 million, or 11.3% of sales,
compared with $82.9 million, or 11.6% of sales, in the first half of 1998.
Lower expenses as a percentage of sales were due to the inclusion of Cash &
Carry operations, which operate at lower gross margin and expense levels than
Smart & Final stores and an intensive corporate-wide expense reduction program.
These improvements were partially offset by higher foodservice distribution
expenses including increased sales commission expenses associated with higher
foodservice distribution gross margins.
Interest Expense, net. Interest expense, net increased from $4.6 million,
or 0.6% of sales, in the first half of 1998 to $10.1 million, or 1.2% of sales,
in the comparable 1999 period. This increase was a result of higher weighted
average borrowings as well as higher weighted average interest rates as a result
of the Company's debt restructuring in late 1998.
13
Financial Condition
Cash and cash equivalents were $20.9 million on January 3, 1999, and $34.4
million at June 20, 1999. Cash provided by operating activities, for the
twenty-four weeks ended June 20, 1999, was $23.2 million. The rights offering
and other stock purchase agreements generated net proceeds of $59.9 million.
Proceeds of the rights offering were used to reduce the note payable to the
Company's majority shareholder by $39.4 million and the revolving debt by $19
million. Other changes in debt were additional borrowings of $10 million and
payments of $6.5 million. Investments in fixed asset and other additions were
$13.6 million and $1.1 million of dividends were paid.
During the twenty-four weeks ended June 20, 1999, trade notes and accounts
receivable decreased $10.2 million and inventories declined by $6.8 million as a
result of a program to reduce cash investments in working capital. Other
changes in operating assets and liabilities generally reflect the timing of
receipts and disbursements. Accounts payable decreased $9.3 million and other
liabilities decreased $5.5 million while prepaid expenses decreased $4.4 million
and other accrued liabilities increased $1.5 million in the first half of 1999.
Stockholders' equity increased from $189.3 million to $249.2 million at
June 20, 1999. This increase includes the effect of the $57.9 million, net of
fees, rights offering completed during second quarter 1999, as well as a $1.2
million increase due to the issuance of stock resulting from the exercise of
stock options and other stock purchase agreements and the $0.8 million income
for the first half of 1999.
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flow
from operations. Cash provided by operating activities was $23.2 million in the
first half of 1999 and in the comparable 1998 period. At June 20, 1999, the
Company had cash of $34.4 million, compared to $20.9 million at January 3, 1999.
The Company had $157.3 million of debt, excluding capital leases, and
stockholders' equity of $249.2 million at June 20, 1999.
During second quarter, 1999, the Company completed its fixed-price rights
offering pursuant to a registration statement on Form S-3 filed in April 1999.
The offering increased stockholders' equity by $57.9 million after expenses of
the offering. The Company's majority shareholder increased its ownership by
4,271,935 shares and paid for its subscribed shares by exchanging $39.4 million
of its $55.4 million loan to the Company. The Company used the $19 million
proceeds from other stockholders to pay down its revolving loan.
As of the end of second quarter, 1999, the Company was in compliance with
financial covenants contained in its loan agreements, as amended during the
latter part of June 1999.
The Company expects to be able to fund future acquisitions and other cash
requirements by a combination of available cash, cash from operations, lease
financings and other borrowings and proceeds from the issuance of equity
securities. It believes that its sources of funds are
14
adequate to provide for working capital, other capital expenditures, and debt
service requirements for the foreseeable future.
Year 2000
The Company relies on a diverse assortment of computer hardware and
software, the integrated operation of which is essential to the successful
implementation of the Company's operations. In 1996, the Company began a
comprehensive review of its information technology systems and other systems and
equipment and has developed a Year 2000 implementation program. The
implementation program has been reviewed by the Company's Board of Directors.
Full compliance and testing is scheduled to be completed by the end of third
quarter 1999.
The entire implementation program is divided into three broad systems, the
corporate systems, the store systems and the foodservice systems and the program
has two phases, the impact analysis phase and the modification or replacement
phase.
The impact analysis phase for the corporate systems, which includes the
identification of date sensitive computer codes within the systems, has been
completed. The modification or replacement phase for the corporate systems is
substantially complete with one remaining subsystem to be completed by the end
of third quarter 1999.
The impact analysis phase for the store systems has been completed and the
modification or replacement phase is to be completed by the end of third
quarter 1999. The impact analysis phase for the foodservice systems also has
been completed, and the modification or replacement phase is on schedule to be
completed by the end of the third quarter of 1999.
Except for the cost of replacement systems, the Company will expense, as
incurred, the cost of the Year 2000 program. The Company is funding the costs
associated with the Year 2000 program through operating cash flows. The Company
estimates the total incremental cost of the Year 2000 program will not exceed
$2.7 million. As of June 20, 1999, the Company had incurred approximately $1.8
million in costs with respect to the Year 2000 program.
As part of the Year 2000 project, the Company has identified relationships
with third parties, including vendors, suppliers, and service providers, which
the Company believes are critical to its business operations. The Company is in
the process of communicating with these third parties through questionnaires,
letters and interviews in an effort to determine the extent to which they are
addressing their Year 2000 issues. The Company will continue to communicate
with, assess and monitor the progress of these third parties in resolving Year
2000 issues.
The Company anticipates minimal disruptions in its operations as a result
of system failures related to Year 2000 issues. If the Company or a key third
party experiences a systems failure due to the century change, the Company
believes the most significant adverse impact would be its inability to
communicate with suppliers concerning timely delivery of inventory. Other
possible consequences include, but are not limited to, loss of communications
with stores, loss of electric power, and an inability to process customer
transactions or otherwise engage in
15
similar normal business activities. The Company cannot assure that there will
not be an adverse impact on the Company if third parties do not appropriately
address their Year 2000 issues in a timely manner.
Although the Company does not believe the actual impact of these failures
will be material, the Company is currently developing a contingency plan for
possible Year 2000 issues including the delivery of inventory and processing of
customer transactions. The Company will continue to develop these plans based
on its internal testing results, tests with third parties and its assessment of
other outside risks. The Company will continually refine its contingency plan
throughout 1999, as additional information becomes available.
16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to market risks relating to fluctuations in interest
rates. The Company's objective of financial risk management is to minimize the
negative impact of interest rate fluctuations on the Company's earnings and cash
flows. Interest rate risk is managed through the use of interest rate collar
contracts to hedge principal amounts of up to $100 million. The agreements
limit LIBOR fluctuations to interest rate ranges from 4.7% to 8.0% and extend to
September 2004. These contracts are entered into with major financial
institutions thereby minimizing risk of credit loss.
Credit Risk
The Company is exposed to credit risk on accounts receivable. The Company
provides credit to customers in the ordinary course of business and performs
ongoing credit evaluations. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base. The Company currently believes its allowance for doubtful
accounts is sufficient to cover customer credit risks.
Forward-Looking Statements
From time to time Smart & Final may publish forward-looking statements
about anticipated results. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that such forward-looking
statements are based upon internal estimates which are subject to change because
they reflect preliminary information and management assumptions, and that a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. The factors which could cause
actual results or outcomes to differ from such expectation include the extent of
the company's success in (i) changing market conditions (ii) unforeseen costs
and expenses (iii) ability to attract new customers and retain existing
customers (iv) gain or losses from sales along with the uncertainties (v)
increases in interest rates of the Company's cost of borrowing and other
factors, including unusually adverse weather conditions, described from time to
time in the company's SEC filing and reports. This report includes "forward-
looking statements" including, without limitation, statements as to the
Company's liquidity and availability of capital resources.
17
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The annual Meeting of Stockholders of the Company was held on May
11, 1999. At the meeting, stockholders (1) elected three directors of
the Company, (2) approved an amendment to the Company's Long-Term
Equity Compensation Plan, (3) approved two amendments to the Company's
Non-Employee Director Stock Plan and (4) ratified the selection of
Arthur Andersen LLP, independent public accountants, as auditors for
the Company for the year ending January 2, 2000.
The three directors elected at the meeting were Timm F. Crull,
Ross E. Roeder, and Joel-Andre Ornstein. The directors whose term of
office as a director continued after the meeting are Pierre B.
Bouchut, Christian P. Couvreux, James S. Gold, Antoine Guichard, David
J. McLaughlin, Thomas G. Plaskett, and Etienne Snollaerts.
The votes cast for, against, or withheld, as well as the number
of abstention and broker non-votes for each nominee for office as a
director were as follows:
VOTES Broker
-------------------------------
For Against Withheld Abstentions Non-Votes
---------- ------- -------- ----------- ---------
Timm F. Crull 17,462,540 -- 644,590 -- --
Ross E. Roeder 17,461,540 -- 643,665 -- --
Joel-Andre Ornstein 17,458,790 -- 646,415 -- --
The votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes for approving an amendment to the
Company's Long-Term Equity Compensation:
VOTES Broker
---------------------------------
For Against Withheld Abstentions Non-Votes
---------- --------- -------- ----------- ---------
Approval of amend- 15,150,133 1,654,342 -- 16,444 1,284,286
ment to the Company's
Long-Term Equity
Compensation Plan
18
The votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes for approval of two amendments to the
Company's Non-Employee Director Stock Plan:
VOTES Broker
---------------------------------
For Against Withheld Abstentions Non-Votes
---------- --------- -------- ----------- ---------
Approval of two 16,616,404 186,466 -- 18,050 1,284,285
Amendments to the
Company's Non-Employee
Director Stock Plan
The votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes for ratification of Arthur Andersen
LLP, as auditors for the Company for the year ending January 2, 2000
were as follows:
VOTES Broker
---------------------------------
For Against Withheld Abstentions Non-Votes
---------- --------- -------- ----------- ---------
Ratification of 18,091,422 6,845 -- 6,938 --
Arthur Andersen LLP
as auditors for the
Company for the year
ending January 2, 2000
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit
-------------- ----------------------
10.89 Long-Term Equity Compensation Plan, as amended
10.119 Employment Agreement between the Company and Ross
E. Roeder* dated May 11, 1999
10.120 Smart & Final Non-Employee Director Stock Plan, as
amended*
10.121 Standby Purchase Agreement between the Company and
Casino USA, Inc. dated as of May 10, 1999
10.122 Third Amendment to Participation Agreement and
Amendment to Revolving Credit Agreement dated as
of June 23, 1999
19
10.123 Addendum to Promissory Note, dated June 11, 1999,
by Smart & Final Inc. on Behalf of Casino USA,
Inc.
27 Financial Data Schedule
--------------
* Management contracts and compensatory plans, contracts and
arrangements of the Company.
(b) Reports on Form 8K
None
20
SIGNATURES
Pursuant to the requirements of the securities exchange act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMART & FINAL INC.
By:
Date: July 30, 1999 /s/ MARTIN A. LYNCH
------------------------------------------
Martin A. Lynch
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer of the Company
21
SMART & FINAL INC.
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.89 Long-Term Equity Compensation Plan, as amended
10.119 Employment Agreement between the Company and Ross E.
Roeder* dated May 11, 1999
10.120 Smart & Final Non-Employee Director Stock Plan, as amended*
10.121 Standby Purchase Agreement between the Company and Casino
USA, Inc. dated as of May 10, 1999
10.122 Third Amendment to Participation Agreement and Amendment to
Revolving Credit Agreement dated as of June 23, 1999
10.123 Addendum to Promissory Note, dated June 11, 1999, by Smart
& Final Inc. on Behalf of Casino USA, Inc.
27 Financial Data Schedule
22